Plenty of scope for active managers to add value

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Europe is a rich, highly developed part of the world which is home to a vast range of companies. However, on occasion it still seems to struggle to attract attention from serious investors around the world. There’s always a handy excuse: “Why bother when it’s only a play on more interesting parts of the world?” or “There’s never any earnings growth, is there?” or “Don’t the politics make it un-investable?” Wrong.

The drivers behind the Eurozone economy are now predominantly domestic. This is a fundamental break from the recent past when growth was dependent on exports to faster growing parts of the world. Europe’s recovery from the crisis years kicked in later than in the US, but is now firmly on track thanks to a steady, expectation-busting pickup in private consumption and (more recently) investment. Banks are lending again and unemployment is falling. A domestic demand-led recovery is far harder to stop in its tracks than one based on exporting your way out of trouble. This means Europe should be better able to cope with exchange rate fluctuations. It also has major ramifications for the kind of stocks we want to own.

Earnings growth should continue in 2018

Earnings growth is back. After a very respectable increase in 2017, the stars are looking well-aligned for 2018 given our economic outlook. Early indications also point to further acceleration in capital expenditures in 2018, implying positive knock-on effects for the corporate ecosystem.

And then there's politics

Politics is always good for a headline or sound bite in our news-obsessed world. Being a democratic kind of place with quite a lot of countries and, therefore, quite a lot of elections, Europe generates a lot of political news.
In the end, politics only matters from an investment point of view when it poses a genuine threat to financial markets. In reality, Europe has seen far more market-friendly political outcomes than many commentators have predicted in the recent past. Note that France elected President Emmanuel Macron (who is promoting a market-friendly reformist agenda) and rejected the divisive, destructive Marine Le Pen. Looking forward, we work from the maxim that it is important to distinguish between the probable and the merely possible, which leaves us relatively relaxed about the market implications of political trends within the future European Union of 27 states.

 

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